FAPRI calculates cap and trade costs

With a climate bill having passed the House and now being hotly debated in the Senate, questions about the potential legislation abound. At the request of Sen. Kit Bond, R-Mo., to crunch data to show the impacts of cap and trade legislation on Missouri farmers, Food and Agricultural Policy Research Institute analysts recently joined the discussion.

In late July, Pat Westhoff, co-director of the Columbia, Mo.-based FAPRI, spoke with Southeast Farm Press about that study, about the direction of the current debate and the most important exchanges during the July 22 Senate Agriculture Committee hearings. Among his comments:

On the Senate Agriculture Committee cap and trade testimony…

“Most of what we heard was probably what we expected to hear. On the production cost estimates, USDA’s estimates and FAPRI’s are consistent once you take into account some differences in assumptions.

“The big unknown that they wouldn’t talk about much is the question of how much farmland is used for other purposes. That came up with Sen. Johanns and Sen. Roberts about how many acres shift to forestry and what will that mean? There were several attempts (by Johanns) to get an answer and he never did.”

The EPA administrator said some estimates claim in the tens of millions of farmland acres could go to forest...

“I’ve heard various estimates from different people. I honestly don’t know what the EPA estimates imply because there are some conversion ratios. But it is a significant number of acres. That much is pretty clear.

“The Farm Bureau claims 40 million acres (will be lost). I’m not quite sure where they got that number from. But the basic message is a lot of people believe there’s a good chance this could cause a lot of land to shift to other uses. That has to have an impact.”

Are the proper issues being addressed by Congress during these hearings? Are there things being left out that must be fully vetted?

“One of those questions arose yesterday. If the sort of land shift that some people are suggesting occurs, that could be far more important than what has been focused on thus far. Even the production cost estimates (FAPRI) and others have done could pale in comparison to the price impacts we might get if that much acreage really changes to other uses.

“I’m not judging and saying that would really happen. But that’s the sort of question we need to get a better handle on.”

On the study…

“With the study, we responded to a request from Sen. Bond who wanted estimates for what (the cap and trade bill) would mean for a set of Missouri farms. We looked at corn, wheat and soybean production and started with some budgets we have built previously on a typical mix of production costs.

“From there, we had to make some assumptions. There are several very important assumptions that drive our results:

“Future energy prices will change as estimated by CRA International, a private consulting group that has done analysis of what the House bill impacts might be on the general economy.

“Those estimates are not the same as the EPA’s and that’s a reason for the differences between (FAPRI’s) estimates and those of USDA.”

The EITE — Energy-Intensive Trade-Exposed entities provision of the House bill.

“If something qualifies as an EITE it can receive free allotments of (carbon) credits in the early years of the bill in order to offset increased energy costs.

“One question: will that include nitrogen fertilizer users? That appears to be provided for in the House bill. The USDA ran the numbers both ways.

“We didn’t take the EITE provision into account, so we assumed nitrogen users will see the full increase in natural gas costs.”

On individual crops…

“Looking at individual crops, in the case of dryland corn we show a $10.03 per acre increase in cost for Missouri producers in 2020. I want to stress the lion’s share of that ($8.49) is for increased fertilizer costs. If the EITE provisions truly insulate producers from increased energy costs, then most of that $8.49 would go away.

“However, those provisions phase out over time.

“By 2050, since there’s a much larger increase in natural gas, motor fuel and electricity prices than in 2020, a Missouri dryland corn producer is looking at an increase of about $25 per acre.

“In the case of soybean producers, the effects are much smaller. That isn’t surprising because there’s less worry about nitrogen fertilizer. So the percentage increase for soybean costs is about 1.6 percent in 2020 ($2.91 per acre), in 2050 the increase is $8.01 per acre (4.4 percent).

“Percentage-wise, the numbers for wheat are comparable to corn. Even though the per-acre numbers are lower, the mix of inputs in wheat production is fairly similar to corn.”

On representative farms…

“For this, we multiplied the per acre estimates by a certain number of acres on three representative farms in Missouri. These are typical, representative farms for full-time producers.

“For example, the Lafayette County farm has 1,900 planted acres (1,000 acres of soybeans/95 acres of wheat/the balance in corn) and, given all the assumptions of our analysis, it’ll increase operating costs about $11,649 in 2020. By 2050, the increase would be over $30,000.”

Do you buy what proponents of cap and trade legislation claim regarding the cost to farmers?

“I encourage people to recognize that there are large amounts of uncertainty in all the estimates provided — FAPRI’s included. It’s very important to note how uncertain the energy cost estimates are. Different firms are providing different estimates. Those numbers are very sensitive.

“EPA did a few scenarios. One of them demonstrated that if international offsets are much tougher to obtain, then the cost of carbon credit goes up dramatically. That would lead to higher prices for everything under the sun.

“There are lots and lot of uncertainties. How many credits can farmers actually sell? Who can sell credits? There are some important distribution impacts that any aggregate analysis will miss. You must get down to particular farms and particular characteristics on them. But you need a global analysis and overall price impacts before you do that.

“I have a hard time thinking of a more complicated set of questions that have ever been asked of us. That’s why, so far, we’ve been very modest in what we’ve tried to do and focused narrowly on production cost impacts. We haven’t attempted a broader analysis.”

Have you been asked to crunch any other numbers on this?

“We have been asked to look at what production cost impacts might be in states other than Missouri. We’re deciding how to proceed.

“Frankly, we need to learn more before we can do much more analysis. We need to better understand how the offset programs would work, the incentives (especially for increased forestry), and another 20 things.”